Advanced Oncotherapy PLC (LON:AVO) is the topic of conversation when Hardman and Co’s Analyst Dr Martin Hall caught up with DirectorsTalk for an exclusive interview

Q1: Advanced Oncotherapy released their interim results at the end of last week, what were your key takeaways from the results?

A1: I think that the important thing is that the company is putting in all the right foundations for their technology and will allow the company to become profitable and give shareholders some good returns.

What they’ve particularly done is to make very good progress on the operational, the commercial and also the scientific knowledge within the company. It’s been very important that they’ve got their outsourced manufacturing agreements in place for what is called the LIGHT system which is a proton beam therapy and this is really designed as a potentially disruptive technology that is expected to produce both clinical benefits and cost benefits as well for the healthcare payers. So, overall, from an operational standpoint and a commercial standpoint, they’ve done extremely well. Also, something that’s very important is that their own first system is going to be put in place in a new site in Harley Street and although they are not directly responsible for the construction of it, that site is well underway, it’s progressing and on schedule. I actually visited it, unexpectedly, myself on Friday and it’s progressing well and of course, that will pave the way for other sites in the UK and there are also discussions in the United States, Europe and the Middle East.

So, overall, they’ve really made some very good progress in the first nine months of this year.

Q2: What do they need to do in the short-term to be on the road to profitability?

A2: I think that the key issue in the short-term is the need for management to get the financing of the project sorted out, they’ve done extremely well but they need to take it just that next step further to get the whole project finished.

To date, there’s been approximately £55-£60 million spent on the overall project plus a hidden and unknown cost that was embedded into the science by CERN, over in Switzerland, over a number of years. Where we are today, more money is required however to finish the project therefore financing is a challenge but good progress does appear to have made and since the period end, management has obtained a loan from existing investors of £3.9 million and in addition, the company received a £3 million tax credit from HMRC. So, this gives them a reasonable runway to get the financing sorted out ready for the next 12-18 months.

To this, I would probably add progress made to date by the company on the LIGHT project has significantly added to the de-risking of the overall project. Of course, as that occurs then confidence I the overall project does improve and that makes financing a little bit easier.

Q3: The technical nature of this project can be daunting to investors, how should they view the risks associated with the technical development side?

A3: When you look at the entire project and the development of what is called the LIGHT system, it does look a very daunting prospect, it involves a number of very technological pieces of equipment, very complex. However, they shouldn’t really view it so much as that because, as in Switzerland, the whole system in principal has been proven before, what they’re doing is they’re refining it for use for the treatment of various forms of cancer.

If you were to try and think of something analogous to what they’re trying to achieve it’s a bit like riding a bicycle and you think of those cyclists going around the velodrome, when they start it’s incredibly difficult but once they actually get moving and have accelerated up to a reasonable speed, then to take it and push it a little bit further is much easier.

So, what Advanced Oncotherapy are doing, they have proven so far that there are four modules in their system, and each module has a number of components, but there are four modules and, so far, they have integrated three of the modules. So, they can create a proton source and then they can accelerate it, first of all up to 5 megaelectron volts which is an incredible achievement and something that was quite a task and subsequently they’ve not added the first of the third modules, there are four in total, they have proven that they can take the energy level up to 7.5 millivolts. When you’ve got the four of third modules all in place together, they’ll be running at about 37.5 MEV at that point and then they bring in this fourth module, there are 10 of those, that will take it up to the full energy level that they require. So, they’ve actually done the hardest part but the integration of three of the four components is a considerable achievement.

In terms of what investors should think of, how much further do they need to go, again they have all of the next modules, the CCL’s, all in place in Switzerland but each stage is more and more de-risking the overall project. So, considerable progress, three of the four modules integrated and the fourth one already positioned so that as soon as they’re ready to add that one, they can.

Q4: Are there any trends in proton therapy market that investors should be looking at?

A4: The one really good thing is that there is incredibly strong demand, there are a number of suppliers of proton beam therapies and the relevant equipment but what has been interesting is that they have signed up contracts to put them into various medical centres but then they are struggling to actually hit the timelines. For example, one of their key European competitors, initially they take 12-18 months to build the machine and then they take 12-18 months to fit it so it’s a 3-year programme, they’ve signed a number of orders but they’re unable to meet that demand in the timelines they’ve said.

I think in contrast, Advanced Oncotherapy has done two things very very well, the first thing is that the whole design is a modular design so it’s not one enormous piece of equipment that needs to be loaded into the health centre in one go which would be an enormous task.

Secondly, they have outsourced the manufacturing to specialists in each area of those components and then what they’re doing is simply taking them on site and putting them together. It’s very different, it’s very disruptive and where existing players are struggling to meet the demands associated with their existing contracts, there is a very good chance that AVO will be able to step in at some point.

Overall, the company is currently working on producing around 8 systems per year as an initial target but there is, as I say, an enormous global demand and using multiple outsourced manufacturers of the components then there is clearly the opportunity to take that up in future, if the demand remains.

Q5: In your view, what are the key attractions potential investors should look out for when considering AVO?

A5: I think, apart from the scientific angle where we believe they clearly have a clinical benefit, a patient benefit and a cost benefit. From a stock market point of view, the first attraction is clearly the market capitalisation. It’s approximately £20 million today and, as I mentioned earlier, this compares to the know sunk costs by Advanced Oncotherapy in the region of £55-£60 million plus, of course, that unquantifiable cost put in by CERN many years ago.

Secondly is the technical differentiation offered compared to the existing large systems that are available from the global manufacturers. For example, the project to put proton beam therapy in the University College London, it needs a special building, it needs an enormous amount of lead protection for both the healthcare workers and the patients and it’s all having to be put into a very expensive purpose-built building. In contrast, the LIGHT system is modular, it’s very much more flexible, there’s more precision in the proton beam and that the system can be inserted, theoretically, into existing buildings, albeit needing some form of refurbishment.

We think overall, the better patient outcomes and at a greatly reduced cost are the key attractions so, as I started to answer your question, it’s the market cap versus the sunk costs and if they hit their targets over the next 12-18 months, it could be a very exciting period ahead.

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